[Federal Register Volume 88, Number 161 (Tuesday, August 22, 2023)]
[Notices]
[Pages 57164-57167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-17979]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98147; File No. SR-ICC-2023-009]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Amendment No. 1 and Partial Amendment No. 2 and Order 
Granting Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1 and Partial Amendment No. 2, Relating to the ICC 
Default Auction Procedures--Initial Default Auctions

August 16, 2023.

I. Introduction

    On June 22, 2023, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
section 19(b)(2) of the Securities Exchange Act of 1934 (the ``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to amend the 
ICC Default Auction Procedures--Initial Default Auctions

[[Page 57165]]

(``Auction Procedures''). The proposed rule change was published for 
comment in the Federal Register on July 11, 2023.\3\ On July 20, 2023, 
ICC filed Amendment No. 1 to the proposed rule change.\4\ On August 8, 
2023, ICC filed Partial Amendment No. 2 to the proposed rule change.\5\ 
The Commission did not receive comments regarding the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Filing of Proposed Rule Change Relating to the ICC Default 
Auction Procedures-Initial Default Auctions; Exchange Act Release 
No. 97840 (July 5, 2023), 88 FR 44171 (July 11, 2023) (File No. SR-
ICC-2023-009) (``Notice'').
    \4\ Amendment No. 1 amended and restated in its entirety the 
Form 19b-4, Exhibit 1A, and Exhibit 5 to correct a typographical 
error in the Auction Procedures. Amendment No. 1 does not change the 
purpose or basis of the proposed rule change.
    \5\ Partial Amendment No. 2 replaced and superseded Amendment 
No. 1, and amended and restated in its entirety the Form 19b-4, 
Exhibit 1A, and Exhibit 5, in addition to including Exhibit 4, to 
correct a typographical error in the Auction Procedures. Partial 
Amendment No. 2 does not change the purpose or basis of the proposed 
rule change.
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    The Commission is publishing this notice to solicit comments on 
Amendment No. 1 and Partial Amendment No. 2 from interested persons, 
and, for the reasons discussed below, is approving the proposed rule 
change, as modified by Amendment No. 1 and Partial Amendment No. 2 
(collectively, the ``proposed rule change''), on an accelerated basis.

II. Description of the Proposed Rule Change

    ICC is registered with the Commission as a clearing agency for the 
purpose of clearing Credit Default Swap (``CDS'') contracts. ICC clears 
CDS contracts for its clearing members, which ICC calls Clearing 
Participants.\6\ In clearing CDS contracts, ICC is exposed to a variety 
of risks, including exposure to losses and liquidity demands, in 
situations such as a Clearing Participant default. One way ICC protects 
against such risk is by ensuring that it has the authority and 
operational capacity to take timely action during a Clearing 
Participant default. To minimize impact on non-defaulting Clearing 
Participants and its own obligations, ICC established the Auction 
Procedures, which document requirements and processes for holding an 
auction in the event of a Clearing Participant default. The Auction 
Procedures are designed to facilitate liquidation of a defaulting 
Clearing Participant's portfolio through a multi-lot modified Dutch 
auction.\7\
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    \6\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in the ICC Default Auction Procedures--
Initial Default Auctions or the ICC Clearing Rules.
    \7\ Notice, 88 FR at 44171.
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    The proposed rule change would revise the Auction Procedures to (1) 
provide an additional exception to ICC's minimum bid requirement under 
particular conditions, and (2) treat all Auction Participants \8\ as 
senior bidders in certain market-dependent circumstances. These 
proposed amendments, as described below, are intended to incorporate 
feedback received from market participants during ICC's 2022 default 
test.\9\ The proposed revisions would also better align ICC's Auction 
Procedures with those of other clearing houses (e.g., LCH Ltd, LCH SA, 
and Eurex),\10\ according to market participants' feedback.\11\
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    \8\ Auction Participants are all non-defaulting Clearing 
Participants and any Direct Participating Customer(s), defined as a 
Clearing Participant's customer(s) that ICC has authorized to 
participate directly in an ICC default auction pursuant to the 
requirements set out in Section 2.6 of the Auction Procedures. Id. 
at n.4.
    \9\ Notice, 88 FR at 44171.
    \10\ These three clearing houses have rules and/or default 
procedures that, in general, exclude non-defaulting clearing members 
from mandatory participation in default auctions where such non-
defaulting clearing members do not have exposure to the products in 
the default auction portfolio. Notice, 88 FR at 44172.
    \11\ Notice, 88 FR at 44172.
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A. Additional Exception to Minimum Bid Requirement

    Generally, in the event of an auction to liquidate a defaulting 
Clearing Participant's portfolio, all non-defaulting Auction 
Participants are required to submit minimum bids (``Minimum Bid 
Requirement''). Currently, Section 2.4 requires Auction Participants to 
bid for a minimum notional amount of contracts for each auction, the 
lot determined pro rata based on its required contribution to the ICC 
guaranty fund, subject to certain exceptions.\12\ The proposed rule 
change would amend the Auction Procedures to provide an additional 
exception to the Minimum Bid Requirement. Under the proposed exception, 
the Minimum Bid Requirement would not apply if ICC determined that it 
would be inappropriate for certain Auction Participants in light of: 
(i) the operational and other capabilities of such an Auction 
Participant to clear contracts in the relevant auction lot, or (ii) the 
conditions in the market for the contracts in the relevant auction 
lot.\13\ For example, under the proposed rule change, ICC would be 
allowed to determine whether the Minimum Bid Requirement would apply to 
an Auction Participant if the Auction Participant does not have risk 
management or other operational capabilities to clear the types of 
contracts involved in a particular auction,\14\ or if market conditions 
change for certain types of contracts.\15\ ICC represents that the 
proposed change is designed to disapply minimum bid requirements where 
they might lead to an increase in systemic risk or be inappropriate or 
undesirable in light of ICC's goal of running a successful auction.\16\
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    \12\ Notice, 88 FR at 44171. For example, a Minimum Bid 
Requirement shall not apply to an Auction Participant for a 
particular Lot to the extent it would be in breach of applicable law 
or ICC Rules, or the Lot includes Contracts that are sovereign CDS 
referencing the country in which the Auction Participant or its 
parent company is domiciled. See ICC Initial Auction Procedure, 
Section 2.4.
    \13\ Id.
    \14\ For instance, certain market participants may not trade, or 
have the operational, risk management, or other capacity to trade or 
otherwise manage particular products cleared through ICC, such as 
index swaptions. In that case, if such a participant were forced to 
bid for lots that included these types of products during the course 
of the auction, the participant might acquire products for which it 
may not have the ready capability to manage the risk of its 
positions, thereby potentially increasing systemic risk. Id.
    \15\ Notice, 88 FR at 44171-2.
    \16\ Notice, 88 FR at 44172.
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B. Treatment of Auction Participants as Senior Bidders

    Currently, ICC's rules specify how losses from a default auction 
will be applied.\17\ Under such prioritization, losses would be applied 
to the collateral of a member that does not participate in a default 
auction before being applied to other members' collateral 
(``juniorization''). ICC proposes to amend the Auction Procedures to 
allow ICC to disapply such juniorization where ICC determines that 
juniorization may make it more difficult to run a successful auction or 
is otherwise inappropriate or undesirable for the particular lot in 
light of certain market conditions or circumstances at the time. In 
effect, under the proposed rule change, ICC would be allowed to 
determine that juniorization of Lot Guaranty Fund Contributions and Lot 
Assessment Contributions will not occur, such that all such 
contributions will be applied on a pro rata basis rather than based on 
the relative competitiveness of bids made.\18\
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    \17\ See Auction Procedures, Section 3.3.
    \18\ Such changes would maintain the incentives for competitive 
bidding in a default auction as Auction Participants still would be 
incentivized to protect their guaranty fund deposits and assessment 
contributions, and juniorization would be expected to continue to 
apply in most circumstances. Notice, 88 FR at 44172.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory

[[Page 57166]]

organization if it finds that such proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to such organization.\19\ For the reasons given 
below, the Commission finds that the proposed rule change is consistent 
with section 17A(b)(3)(F) of the Act \20\ and Rule 17Ad-22(e)(13) \21\ 
thereunder.
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    \19\ 15 U.S.C. 78s(b)(2)(C).
    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ 17 CFR 240.17Ad-22(e)(13).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of ICE Clear Credit ``are designed to promote the prompt and 
accurate clearance and settlement of securities transactions and, to 
the extent applicable, derivative agreements, contracts, and 
transactions.'' \22\ Based on its review of the record, and for the 
reasons discussed below, the Commission believes the proposed changes 
to the Auction Procedures are consistent with the promotion of the 
prompt and accurate clearance and settlement of securities 
transactions.
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    \22\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed additional exception to the Minimum Bid Requirement 
provides ICC with greater flexibility to administer a default auction 
with the appropriate set of Auction Participants and respond to 
changing market conditions promptly, while maintaining its clearance 
and settlement responsibilities with the least possible disruption. The 
proposed amendments would allow ICC to determine whether an Auction 
Participant has the operational or other capabilities required to clear 
contracts in a particular lot, thus ensuring an appropriate fit between 
the Auction Participants and the types of contracts involved in the 
auction. The proposal would also give ICC the leeway to respond to 
changing market forces to hold a timely default auction that is 
responsive to the characteristics and implications of the contracts in 
the relevant auction lot. Similarly, the proposed revisions to the 
Auction Procedures would give ICC the latitude to disapply the Default 
Auction Priority and treat all Auction Participants as senior bidders 
in limited circumstances, thus helping ICC run a successful, effective, 
and efficient default auction in circumstances where the juniorization 
of Auction Participants would be unsuitable for the auction, and 
facilitating the prompt and accurate close-out of the defaulter's 
portfolio.
    As such, the Commission finds that the proposed rule change is 
consistent with section 17A(b)(3)(F) of the Act.\23\
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    \23\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(13)

    Rule 17Ad-22(e)(13) requires ICC to ``establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to [. . .] [e]nsure the covered clearing agency has the 
authority and operational capacity to take timely action to contain 
losses and liquidity demands and continue to meet its obligations [. . 
.].'' \24\ Based on its review of the record, and for the reasons 
discussed below, the Commission believes the proposed changes to the 
Auction Procedures are consistent with the requirements of Rule 17Ad-
22(e)(13).\25\
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    \24\ 17 CFR 240.17Ad-22(e)(13).
    \25\ Id.
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    The proposed exception to the Minimum Bid Requirement would provide 
ICC the authority to not force a Clearing Participant to bid on lots 
containing contracts that the Clearing Participant is not equipped to 
manage financially or operationally. Excepting such a Clearing 
Participant from the bidding process should reduce the likelihood of 
ICC receiving poor quality bids, thereby improving the auction process. 
In foregoing the Minimum Bid Requirement for Auction Participants who 
are not appropriately positioned to take on certain types of contracts, 
ICC would be giving itself the ability to take steps, in limited 
circumstances, to streamline the auction process and limit potential 
losses or liquidity demands resulting from a Clearing Participant's 
default. Similarly, the proposed change to allow ICC to disapply the 
juniorization of certain Clearing Participants' guaranty fund 
contributions would better align ICC's default management practices 
with its members' financial and operational capacities. Imposing the 
Minimum Bid Requirement or incentivizing bidding through the 
juniorization process where a Clearing Participant lacks necessary 
financial or operational capabilities could result in that Clearing 
Participant acquiring products whose risks it is not prepared to 
manage. The proposed rule change would allow ICC to protect the 
integrity of the default auction and increase its likelihood of success 
by ensuring that the bids received are provided by members most able to 
value and risk manage the defaulter's portfolio.

IV. Solicitation of Comments on Amendment No. 1 and Partial Amendment 
No. 2 to the Proposed Rule Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1 and Partial Amendment No. 2, is 
consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#4331362f266e202c2e2e262d3730033026206d242c35"><span class="__cf_email__" data-cfemail="4b393e272e66282426262e253f380b382e28652c243d">[email protected]</span></a>. Please include 
File Number SR-ICC-2023-009 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549.

All submissions should refer to File Number SR-ICC-2023-009. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filings will also be available for inspection and 
copying at the principal office of ICE Clear Credit and on ICE Clear 
Credit's website at https://www.theice.com/clear-credit/regulation.
    Do not include personal identifiable information in submissions; 
you should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection. 
All submissions should refer to File Number SR-ICC-2023-009 and

[[Page 57167]]

should be submitted on or before September 12, 2023.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1 and Partial Amendment No. 2

    The Commission finds good cause, pursuant to section 19(b)(2) of 
the Act,\26\ to approve the proposed rule change prior to the 30th day 
after the date of publication of notice of the filing of Amendment No. 
1 and Partial Amendment No. 2 in the Federal Register. As discussed 
above, Amendment No. 1 amended and restated in its entirety the Form 
19b-4, Exhibit 1A, and Exhibit 5 to correct a typographical error in 
the Auction Procedures, and Partial Amendment No. 2 replaced and 
superseded Amendment No. 1, and amended and restated in its entirety 
the Form 19b-4, Exhibit 1A, and Exhibit 5, in addition to including 
Exhibit 4, to correct a typographical error in the Auction Procedures. 
Amendment No. 1 and Partial Amendment No. 2 do not change the purpose 
of or basis for the proposed changes.
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    \26\ 15 U.S.C. 78s(b)(2).
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    For similar reasons as discussed above, the Commission finds that 
Amendment No. 1 and Partial Amendment No. 2 are consistent with the 
requirement that ICC's rules be designed to promote the prompt and 
accurate clearance and settlement of securities transactions under 
section 17A(b)(3)(F) of the Act.\27\ Accordingly, the Commission finds 
good cause to approve the proposed rule change, as modified by 
Amendment No. 1 and Partial Amendment No. 2, on an accelerated basis, 
pursuant to section 19(b)(2) of the Act.\28\
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    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change, as modified by Amendment No. 1 and Partial 
Amendment No. 2, is consistent with the requirements of the Act, and in 
particular, with the requirements of section 17A(b)(3)(F) of the Act, 
and Rule 17Ad-22(e)(13) thereunder.\29\
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    \29\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(e)(13).
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    It is therefore ordered pursuant to section 19(b)(2) of the Act 
\30\ that the proposed rule change (SR-ICC-2023-009), as modified by 
Amendment No. 1 and Partial Amendment No. 2, be, and hereby is, 
approved on an accelerated basis.\31\
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    \30\ 15 U.S.C. 78s(b)(2).
    \31\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-17979 Filed 8-21-23; 8:45 am]
BILLING CODE 8011-01-P


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